402 F.

3d 489

Jerry KRIM; et al., Plaintiffs,

David Petrick, Lead Plaintiff; Bret Beebe, Lead Plaintiff; Gene
Burke, Lead Plaintiff, Plaintiffs-Appellants,
Dawn Rusing-Bell; Kishore Mehta; Dierdre Humphrey,
Appellants,
v.
PCORDER.COM, INC.; Ross A. Cooley; Trilogy Software,
Inc.; Peter J. Barris; Joseph A. Liemandt; Robert W. Stearns;
Linwood A. Lacy, Jr., Defendants-Appellees.
Jean Schwartz Burke, On Behalf of Herself and All Others
Similarly Situated; Plaintiff-Appellant,
Dawn Rusing-Bell; Kishore Mehta; Dierdre Humphrey,
Appellants,
v.
PcOrder.com, Inc.; Ross A. Cooley; Cristina C. Jones; James J.
Luttenbacher; Joseph A. Liemandt; Peter J. Barris; Linwood
A. Lacy, Jr.; Robert W. Stearns; Trilogy Software, Inc.;
Goldman, Sachs & Co.; Credit Suisse First Boston; SG Cowen
& Co., Defendants-Appellees.
Barry J. Pinkowitz, On Behalf of Himself and All Others
Similarly Situated, Plaintiff,
Dawn Rusing-Bell; Kishore Mehta; Dierdre Humphrey,
Appellants,
v.
PcOrder.com, Inc.; Ross A. Cooley; Cristina C. Jones; James J.
Luttenbacher; Joseph A. Liemandt; Peter J. Barris; Linwood
A. Lacy, Jr.; Robert
W. Stearns; Trilogy Software, Inc.; Goldman, Sachs & Co.;
Credit Suisse First Boston; SG Cowen & Co., DefendantsAppellees.
No. 03-50737.

United States Court of Appeals, Fifth Circuit.

March 1, 2005.

James D. Baskin, III (argued), The Baskin Law Firm, Austin, TX, Joe R.
Whatley, Jr., Whatley Drake, Birmingham, AL, for Plaintiffs-Appellants
and Appellants.
James Edward Maloney, Baker Botts, Houston, TX, for pcOrder.com,
Inc., Ross A. Cooley, Christina C. Jones and James J. Luttenbacher.
Noel M.B. Hensley (argued), P. Nicholas Even, Richard Thaddeus
Behrens, Haynes & Boone, Dallas, TX, for Trilogy Software, Inc., Peter J.
Barris and Joseph A. Liemandt.
Robert W. Brownlie, Gray, Cary, Ware & Freidenrich, San Diego, CA,
Alan D. Albright, Geoffrey Robert Unger, Gray, Cary, Ware &
Freidenrich, Austin, TX, for Robert W. Stearns and Linwood A. Lacy, Jr.
Harry M. Reasoner, Karl S. Stern, Gary Ewell, Vinson & Elkins, Houston,
TX, for Goldman Sachs & Co., Credit Suisse First Boston and SG Cowen
& Co.
Appeal from the United States District Court for the Western District of
Texas.
Before HIGGINBOTHAM, DAVIS and GARZA, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:

Investors who purchased stock in pcOrder.com brought this consolidated

securities action under Sections 11 and 15 of the Securities Act of 1933 against
defendants pcOrder.com, its directors, its controlling shareholder Trilogy
Software, and its investment bankers (collectively "PCOrder"), alleging that the
registration statements filed with the Securities and Exchange Commission
were false and misleading. The district court concluded that, with one
exception, the investors lacked Section 11 standing because they could not
trace their stock to the registration statements in question. Finding the
remaining investor's claims moot, the court dismissed all of the claims and
denied a third-party motion to intervene. We affirm.

* PCOrder conducted an initial public offering of pcOrder.com stock on

February 26, 1999, and a secondary public offering on December 7, 1999. In

connection with each offering PCOrder filed a registration statement with the
SEC.
3

Several holders of pcOrder.com stock filed multiple lawsuits against PCOrder

under Section 11 of the Securities Act of 1933, which provides a right of action
to "any person acquiring" shares issued pursuant to an untrue registration
statement.1 The plaintiffs alleged that the registration statements were false and
misleading by indicating that pcOrder.com had a viable business plan, had an
ability to generate and report accurate operating and financial information, and
was not competing with Trilogy Software for revenue. The district court
consolidated the actions and appointed Lead Plaintiffs.2 The Lead Plaintiffs
sought to have a class action certified and have themselves designated as class
representatives.

In its October 21, 2002, order denying class certification, 3 the district court first
found that none of the Lead Plaintiffs purchased their stock during the public
offerings that is, they were "aftermarket" purchasers.4 However, it held that
Section 11 is available not only to those who purchased their stock during the
relevant public offerings, but also to aftermarket purchasers as long as the stock
is "traceable" back to the relevant public offering. 5

The district court then considered whether Lead Plaintiffs Beebe, Dr. Burke,
and Petrick could trace their stock back to either of the two public offerings.
The district court found that the approximately 2.5 million shares issued in the
pcOrder.com IPO were registered in a stock certificate in the name of Cede &
Co., the nominee of the Depository Trust Company. The court found that, on
April 19, 1999, when Beebe purchased 1000 of these "street name" shares, the
pool of street name stock still contained only the IPO stock. Therefore, because
all of his stock was necessarily IPO stock, Beebe was able to satisfy the
traceability requirement and establish standing.

In contrast, the court concluded that standing was lacking for Dr. Burke and
Petrick. By the end of June 1999 when Dr. Burke purchased 3000 shares, the
court found that non-IPO shares specifically, insider shares had entered
the street name certificate and intermingled with the IPO shares, but that IPO
shares still comprised 99.85% of the pool. Subsequent to the December 7,
1999, secondary public offering, Dr. Burke made additional purchases and
Petrick also purchased a number of shares at a time when IPO and SPO shares
(collectively "PO stock") constituted 91% of the market. Appellants' expert
acknowledged that there is no way to track individual shares within a pool once
it becomes contaminated with outside shares.

In light of the intermingling of PO and non-PO stock in the market at the time
of their purchases even though PO stock was the overwhelming majority
the district court held that Dr. Burke and Petrick could not demonstrate that
their shares were traceable to the public offering registration statements. In
reaching this conclusion, the court considered expert testimony indicating that,
given the number of shares owned by each Lead Plaintiff and the percentage of
PO stock in the market, the probability that each Lead Plaintiff owned at least
one share of PO stock was very nearly 100%.6 However, the court held that this
did not satisfy the traceability requirement because the "Lead Plaintiffs must
demonstrate all stock for which they claim damages was actually issued
pursuant to a defective statement, not just that it might have been, probably
was, or most likely was, issued pursuant to a defective statement."7 The district
court noted that, "[o]therwise, `all persons who held stock in street name on
and after the offering date could claim a proportional interest in the shares.'"8

Having found that Dr. Burke and Petrick lacked Section 11 standing, the court
concluded that they could not serve as class representatives and denied class
certification.9 We rejected a request for an interlocutory appeal. 10

On May 5, 2003, the district court granted PCOrder's motion to dismiss for lack
of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1).11
The district court reiterated its conclusion that Beebe had standing to sue under
Section 11, but that Dr. Burke and Petrick did not. It concluded that the other
plaintiffs, Barry Pinkowitz, Jerry Krim, and Jean Schwartz Burke, also lacked
standing because they too could not trace their stock back to the public
offerings.12 The court dismissed all of these claims without prejudice. The court
then dismissed Beebe's claim as moot because PCOrder had offered Beebe a
settlement equal to his full recovery under the statute. Having disposed of the
suits, the district court denied a motion to intervene by three individuals
("Intervenors") 13 and entered final judgment in favor of PCOrder. Appellants14
challenge the district court's rulings regarding standing and the motion to
intervene. The denial of class certification is not before us.

II
10

In general, we review a dismissal for lack of subject matter jurisdiction

pursuant to Rule 12(b)(1) de novo.15 "A case is properly dismissed for lack of
subject matter jurisdiction when the court lacks the statutory or constitutional
power to adjudicate the case."16 In considering a challenge to subject matter
jurisdiction, the district court is "free to weigh the evidence and resolve factual
disputes in order to satisfy itself that it has the power to hear the case."17 We
review the district court's jurisdictional findings of fact for clear error.18 The

denial of a motion to intervene as of right is reviewed de novo.19 The denial of a

permissive motion to intervene is reviewed for abuse of discretion.20
III
11

* Appellants argue that Dr. Burke, Mrs. Burke, and Petrick can establish
Section 11 standing by proffering nothing more than statistics indicating a high
mathematical probability, based on the number of shares purchased by each
individual and the number of PO shares in the market, that at least some of their
shares were issued pursuant to the challenged registration statement. We
disagree.21

12

* We turn first to the language of the statute. 22 In general, the Securities Act of
1933 ("Securities Act")23 "is concerned with the initial distribution of
securities."24 Section 11 of the Securities Act, imposing civil liability for public
offering of securities pursuant to a false registration statement, permits "any
person acquiring such security" to sue.25 While Section 11's liability provisions
are expansive creating "virtually absolute" liability for corporate issuers for
even innocent material misstatements26 its standing provisions limit putative
plaintiffs to the "narrow class of persons" consisting of "those who purchase
securities that are the direct subject of the prospectus and registration
statement."27

13

In Rosenzweig v. Azurix Corp., we recently held that aftermarket purchasers do

not inevitably lack standing.28 The district court here foreshadowed this in
holding that Section 11's "language suggests a much broader class of potential
plaintiffs than those who literally purchased their shares in the challenged
offering."29 Indeed, the plain language of the statute confers standing on "any
person acquiring such security,"30 and there is no reason to categorically
exclude aftermarket purchasers, "`so long as the security was indeed issued
under that registration statement and not another.'"31 As such, aftermarket
purchasers seeking standing must demonstrate the ability to "trace" their shares
to the faulty registration.32 As one court explained:

14

[T]o be able to take advantage of the lower burden of proof and almost strict
liability available under 11, a plaintiff must meet higher procedural standards.
The most significant of the procedural standards is the requirement that a
plaintiff be able to trace the security for which damages are claimed to the
specific registration statement at issue.33

15

In Rosenzweig, we further held that this traceability requirement is satisfied, as

a matter of logic, when stock has only entered the market via a single
offering. 34 We did not speculate on what other methods might be available to
satisfy the traceability requirement for aftermarket purchases, but we were
careful to note the Supreme Court's concern "that the Securities Act remain
anchored to its original purpose of regulating only public offerings."35
16

Appellants, as aftermarket purchasers, assert that they can also demonstrate

standing by showing a very high probability that they each have at least one PO
share. Appellants argue that their statistical determinations, being over 50%,
demonstrate by a preponderance of the evidence, that it is "more likely than
not," that their shares are traceable to the public offerings in question.

17

We are persuaded that accepting such "statistical tracing" would impermissibly

expand the statute's standing requirement. Because any share of pcOrder.com
stock chosen at random in the aftermarket has at least a 90% chance of being
tainted, its holder, according to Appellants' view, would have Section 11
standing.36 In other words, every aftermarket purchaser would have standing for
every share, despite the language of Section 11, limiting suit to "any person
acquiring such security."37 As the district court found, it is "likely that any
street name shareholder can make a similar claim with regard to one share."38
This cannot be squared with the statutory language that is, with what
Congress intended. We decline the invitation to reach further than the statute.

18

The fallacy of Appellants position is demonstrated with the following analogy.

Taking a United States resident at random, there is a 99.83% chance that she
will be from somewhere other than Wyoming.39 Does this high statistical
likelihood alone, assuming for whatever reason there is no other information
available, mean that she can avail herself of diversity jurisdiction in a suit
against a Wyoming resident? Surely not.40

19

In limiting those who can sue to "any person acquiring such security," Congress
specifically conferred standing on a subset of security owners (unless of course,
as in Rosenzweig, all shares in the market are PO shares). To allow Appellants
to satisfy the tracing requirement for aftermarket standing in this case with the
proffered statistical methodology would contravene the language and intent of
Section 11.

2
20

Appellants urge this Court to not hew the statutory line, contending that to do
so, in light of current market conditions, effectively precludes recovery under

Section 11; that there is no reason to "express a preference for" the interests of
defendants over plaintiffs. Appellants point out that, given the fungible nature
of stocks within a street name certificate, it is virtually impossible to
differentiate PO shares from non-PO shares.
21

However, as we have explained, Section 11 is available for anyone who

purchased directly in the offering and any aftermarket purchasers who can
demonstrate that their shares are traceable to the registration statement in
question e.g. when, as with Beebe, there had only been one offering at the
time of purchase.41 When Congress enacted the Securities Act of 1933 it was
not confronted with the widespread practice of holding stock in street name that
Appellants describe as an impediment, absent our acceptance of statistical
tracing, to invoking Section 11.42 That present market realities, given the
fungibility of stock held in street name, may render Section 11 ineffective as a
practical matter in some aftermarket scenarios is an issue properly addressed by
Congress. It is not within our purview to rewrite the statute to take account of
changed conditions. In the words of one court, Appellants' arguments may
"have the sound ring of economic reality but unfortunately they merely point up
the problems involved in the present scheme of statutory regulation."43

22

It is, therefore, perhaps not surprising that we failed to locate any court, nor did
Appellants point to any, that found Section 11 standing based solely on the
statistical tracing theory espoused today. Given that the statute has been in
existence for over 70 years and such elementary statistical calculations have
been around for centuries, it is difficult to conclude that this is a coincidence.
We note that a handful of lower courts have rebuffed similar attempts by
plaintiffs.44 In one case, Kirkwood v. Taylor, the district court later
summarily affirmed by the Eighth Circuit rejected the "fungible mass"
method whereby every purchaser is deemed to own a pro rata portion of PO
shares for the purpose of determining Section 11 standing. 45 Because "all
persons who held stock in street name on and after the offering date could
claim a proportional interest in the shares," the court held that "the logical
extension of plaintiffs' fungible mass theory would ... effectively circumvent
the tracing requirement."46 Similar concerns persuade us to reject today's
attempt at statistical tracing.

23

In Barnes v. Osofsky,47 the Second Circuit confronted an intermingled stock

pool not unlike the one we face today. In that case, two individuals challenged
the settlement of a class action alleging Section 11 violations in a secondary
public offering. The challengers, who purchased stock after the SPO, were
unable to trace a portion of their shares to the SPO as opposed to the preexisting
shares on the market. They objected to a provision of the settlement "limiting

the benefits of the settlement to persons who could establish that they
purchased securities issued" in the SPO.48 The court was not deterred by the
reality that this "eliminated those who purchased after the issuance of the
allegedly incomplete prospectus but could not so trace their purchases,"
because Section 11 "extends only to purchases of the newly registered
shares."49 While not addressing the question before us today, Barnes is
nonetheless instructive. Plaintiffs in that case urged a broad reading of Section
11 to cover anyone purchasing stock after the SPO whether or not it was
traceable to the SPO. Not unlike the concerns expressed by Appellants in the
instant case, the plaintiffs in Barnes argued as follows:
24

[O]nce it is agreed that 11 is not limited to the original purchasers, to read

that section as applying only to purchasers who can trace the lineage of their
shares to the new offering makes the result turn on mere accident since most
trading is done through brokers who neither know nor care whether they are
getting [tainted] or [clean] shares.... [I]t is often impossible to determine
whether previously traded shares are [clean] or [tainted], and that tracing is
further complicated when stock is held in margin accounts in street names since
many brokerage houses do not identify specific shares with particular accounts
but instead treat the account as having an undivided interest in the house's
position. 50

25

The court rejected these arguments and rejected the plaintiffs' broad reading of
Section 11's standing requirement as "inconsistent with the over-all statutory
scheme" and "contrary to the legislative history."51 The same is true of
Appellants' view today.

3
26

Appellants' reliance upon the Fourth Circuit's opinion in Friends of the Earth v.
Gaston52 is misplaced. Rather, this case offers support to PCOrder. In Gaston,
the Clean Water Act53 specifically provided standing for persons "having an
interest which is or may be adversely affected."54 This language, chosen by
Congress, "confers standing on a `broad category of potential plaintiffs' who
`can claim some sort of injury,' be it actual or threatened, economic or
noneconomic."55 In fact, "Congress has indicated that this provision confers
standing to enforce the Clean Water Act to the full extent allowed by the
Constitution."56 As such, Gaston illustrates Congress's ability to provide for
standing based on risk, confined only by the strictures of Article III:

27

While Article III sets the minimum requirements for standing, Congress is
entitled to impose more exacting standing requirements for the vindication of

federal statutory rights if it wishes. Here the legislature chose to go to the full
extent of Article III in conferring standing on any person with "an interest
which is or may be adversely affected."57
28

Here, by contrast, Congress conferred standing on those who actually

purchased the tainted stock, not on the whole class of those who possibly
purchased tainted shares or, to put it another way, are at risk of having
purchased tainted shares. Unlike the standing conferred by Congress in the
Clean Water Act, Appellants here cannot meet the statutory standing
requirement of Section 11 merely by showing that they jumped into a
potentially polluted "pool" of stock.58

4
29

Appellants are surely correct in pointing out that, at some level, all evidence is
"probabilistic."59 As we have explained, however, this does not answer the
question before us today. In concluding that Appellants' attempt to "statistically
trace" is incompatible with the standing requirement of Section 11, we cast no
shadow on the use of statistical evidence in general. We recognize, for example,
the widely accepted use of DNA evidence in criminal matters even in capital
murder trials where proof must be beyond a reasonable doubt.60 While both
are rooted in statistical calculations, at least two distinctions between DNA
evidence and the statistics presented by Appellants come to mind. First, in most
trials, DNA evidence does not stand alone. 61 Here, Appellants have relied
exclusively on a presentation of background statistics. Second, in any case,
DNA evidence is more particularistic than the statistics here. DNA analysis
seeks to establish a match between the DNA of a particular individual (e.g. a
suspect) and a "mystery" sample (e.g. from a crime scene), essentially by
quantifying and narrowing the universe of possible sources of the DNA.62 In
contrast, Appellants' evidence merely demonstrates the probability that anyone
with x number of shares will possess some tainted shares. It says nothing about
the shares that one particular individual actually owns. The more particularized
nature of DNA is further evident from the fact that "a nonmatch between any
band of the suspect's DNA and the corresponding band of the questioned
sample conclusively eliminates the suspect as the source of that sample."63
There is no such analog in the general statistics before us today.

30

Unquestionably, principles of probability are powerful tools, when deployed in

appropriate tasks. Unquestionably, the statistics in this case indicate a high
probability that a person purchasing a given number of shares will obtain at
least one tainted share. However, these general statistics say nothing about the
shares that a specific person actually owns and have no ability to separate those

shares upon which standing can be based from those for which standing is
improper. The task before the district court was to determine, by a
preponderance of the evidence, whether and in what amount a plaintiff's shares
are tainted, not whether the same number of shares drawn at random would
likely include at least one tainted share. Understood in this light, statistical
tracing is not up to the task at hand.
5
31

In sum, aftermarket purchasers seeking Section 11 standing must demonstrate

that their shares are traceable to the challenged registration statement. We are
not persuaded that the statistical tracing method advanced today is sufficient to
satisfy this traceability requirement.

B
32

Appellants argue that the district court erred in denying the motion to intervene.
We disagree.

33

As a preliminary matter, we note that this is not a case where intervention is

sought for the purpose of appealing the denial of class certification.64 Indeed,
Appellants have chosen in this appeal not to challenge the class certification
denial.65 Thus, the "prerequisite of an intervention" that there be "an existing
suit within the Court's jurisdiction" depends here on the individual claims.66
That none of the individual claims remained viable on February 14, 2003, when
the motion to intervene was filed, disposes of the attempt at intervention.

34

As we have explained, by October 21, 2002, the district court had correctly
made clear that only Beebe had standing. Furthermore, the district court held
that, as of January 15, 2003, Beebe's individual claims were rendered moot
because PCOrder offered Beebe a settlement equal to the statutory limit on his
damages.67 Appellants do not dispute that a full settlement offer, even if
refused, would dispose of Beebe's individual claims.68 Instead, Appellants
contend that Beebe's claims were not fully satisfied because the involuntary
settlement imposed by the district court did not include prejudgment interest.
The statute, however, does not require prejudgment interest, and such an award
of interest is up to the district court's discretion.69 The district court concluded
that it would deny any request from Beebe for prejudgment interest because the
delay in the payment of his award was due to his "meritless motion for class
certification."70 We are not persuaded that the district court abused its
discretion in denying prejudgment interest. Therefore, as we are not faced on
appeal with a challenge to the denial of class certification, in the absence of

viable individual claims, we are not persuaded that the district court erred in
denying intervention.71
IV
35

For the foregoing reasons the judgment of the district court is AFFIRMED.

Notes:
1

15 U.S.C. 77k(a)

Bret Beebe, Dr. Gene Burke, and David Petrick were appointed Lead Plaintiffs,
along with two other individuals who subsequently dropped out of the suit and
are not part of this appeal

Krim v. pcOrder.com, Inc., 210 F.R.D. 581 (W.D.Tex.2002).

The "aftermarket," also termed the "secondary market," is the "securities

market in which previously issued securities are traded among investors."
BLACK'S LAW DICTIONARY 990 (8th ed.2004)

Krim, 210 F.R.D. at 585. We have since adopted the traceability test and
allowed such aftermarket purchasers to establish standing in Section 11 cases.
See Rosenzweig v. Azurix Corp., 332 F.3d 854, 873 (5th Cir.2003).

Appellants' expert arrived at the odds of getting at least one PO (or "tainted")
share using elementary principles of binomial probabilitySee generally PAUL
G. HOEL, INTRODUCTION TO MATHEMATICAL STATISTICS (4th
ed.1971), cited in Castaneda v. Partida, 430 U.S. 482, 496 n. 17, 97 S.Ct. 1272,
51 L.Ed.2d 498 (1977); see also Vuyanich v. Republic Nat'l Bank of Dallas,
505 F.Supp. 224, 345-46 (N.D.Tex.1980), vacated, 723 F.2d 1195 (5th
Cir.1984).
The expert treated the purchase of shares as a series of independent random
draws from the stock pool (similar to flipping a weighted coin once for each
share), and calculated the probability that at least one of the shares would be
tainted according to the following formula: 1-(1-PO%)# shares, where PO% is
the percentage of PO stock in the market and # shares is the number of shares
owned. For example, at the end of June, when Dr. Burke had purchased 3000
shares, PO shares (specifically IPO shares) constituted 99.85% of the street
name certificate. Therefore, the probability that he owned at least one PO share

was 1-(1-0.9985)3000, or very nearly 100%.

7

Krim, 210 F.R.D. at 586.

Id. at 587 (quoting Kirkwood v. Taylor, 590 F.Supp. 1375, 1380

(D.Minn.1984), aff'd 760 F.2d 272 (8th Cir.1985) (table)).

The district court further concluded as an independent ground for not certifying
the class or appointing the representatives that even if each of the Lead
Plaintiffs had standing to sue under Section 11, they were each, including
Beebe, unqualified to be class representatives because they were, for other
reasons, not able to "fairly and adequately protect the interests of the class."Id.
at 587-89.

10

Krim v. pcOrder.com Inc., No. 03-00001 (5th Cir. Mar. 18, 2003) (order
denying petition for leave to appeal under FED.R.CIV.P. 23(f)).

11

Krim v. pcOrder.com, Inc., No. A-00-CA-776-SS, 2003 WL 21076787

(W.D.Tex. May 5, 2003) (order dismissing for lack of subject matter
jurisdiction and denying intervention).

12

PCOrder's motion to dismiss for lack of standing was unopposed with respect to
the claims of Pinkowitz and KrimId. at *2 n. 1. Jean Burke purchased 200
shares at the end of June 1999 around the same time that her husband, Dr. Gene
Burke, made his initial purchases.

13

The Intervenors were Dawn Rusing-Bell, Kishore Mehta, and Dierdre

Humphrey

14

Appellants include Beebe, Dr. Burke, Mrs. Burke, Petrick and the Intervenors.
No argument is advanced on appeal on behalf of either Krim or Pinkowitz

15

John Corp. v. City of Houston, 214 F.3d 573, 576 (5th Cir.2000); Robinson v.
TCI/US W. Communications Inc., 117 F.3d 900, 904 (5th Cir.1997).
We note that the motion before the district court was styled as a "Motion to
Dismiss for Lack of Subject Matter Jurisdiction, or Alternatively, for Summary
Judgment," but the district court chose to dispose of it as the former. Neither
party has objected on appeal to that choice. In Montez v. Department of Navy
we noted:
[W]here issues of fact are central both to subject matter jurisdiction and the
claim on the merits, we have held that the trial court must assume jurisdiction

and proceed to the merits. In circumstances where "the defendant's challenge to

the court's jurisdiction is also a challenge to the existence of a federal cause of
action, the proper course of action for the district court... is to find that
jurisdiction exists and deal with the objection as a direct attack on the merits of
the plaintiff's case' under either Rule 12(b)(6) or Rule 56."
392 F.3d 147, 150 (5th Cir.2004) (quoting Williamson v. Tucker, 645 F.2d 404,
415 (5th Cir.1981)).
16

Home Builders Ass'n of Miss., Inc. v. City of Madison, 143 F.3d 1006, 1010
(5th Cir.1998) (quoting Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d
1182, 1187 (2d Cir.1996)) (internal quotation marks omitted).

17

Montez, 392 F.3d at 149 (citing Land v. Dollar, 330 U.S. 731, 735 & n. 4, 67
S.Ct. 1009, 91 L.Ed. 1209 (1947)); see Robinson, 117 F.3d at 904 ("A court
may base its disposition of a motion to dismiss for lack of subject matter
jurisdiction on (1) the complaint alone; (2) the complaint supplemented by
undisputed facts; or (3) the complaint supplemented by undisputed facts plus
the court's resolution of disputed facts.").

18

Robinson, 117 F.3d at 904; see also Kelly v. Syria Shell Petroleum Dev. B.V.,
213 F.3d 841, 845 (5th Cir.2000).

19

Doe v. Duncanville Indep. Sch. Dist., 994 F.2d 160, 167 (5th Cir.1993).

20

Bush v. Viterna, 740 F.2d 350, 359 (5th Cir.1984).

21

Appellants' related argument that the district court applied an inappropriately

high burden of proof to the standing issue misses the mark. Appellants correctly
point out that the correct burden of proof is a preponderance of the evidenceSee
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119
L.Ed.2d 351 (1992) (plaintiff's burden of proof on standing issue is same as for
other elements of the claim); Herman & MacLean v. Huddleston, 459 U.S. 375,
390, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983) (burden of proof in securities cases,
in absence of contrary congressional expression, is preponderance of the
evidence). While the district court did not make explicit the standard that it was
applying, it is clear that it found Appellants could not, based solely on general
mathematical probabilities, and in light of admissions about the nature of
securities markets, demonstrate the ability to satisfy the tracing requirement
under any of the proffered standards.

22

See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct.
1917, 44 L.Ed.2d 539 (1975) (Powell, J., concurring).

23

15 U.S.C. 77aet seq.

24

Rosenzweig, 332 F.3d at 861.

25

15 U.S.C. 77k(a). Section 11 provides, in relevant part:

In case any part of the registration statement, when such part became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein not
misleading, any person acquiring such security (unless it is proved that at the
time of such acquisition he knew of such untruth or omission) may, either at
law or in equity, in any court of competent jurisdiction, sue [various
individuals].
Id. (emphasis added).

26

Herman & MacLean, 459 U.S. at 382, 103 S.Ct. 683 ("If a plaintiff purchased a
security issued pursuant to a registration statement, he need only show a
material misstatement or omission to establish his prima facie case. Liability
against the issuer of a security is virtually absolute, even for innocent
misstatements." (footnote omitted)); Lone Star Ladies Inv. Club v. Schlotzsky's
Inc., 238 F.3d 363, 369 (5th Cir.2001).

27

Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 786-87 (2d Cir.1951), quoted in
Barnes v. Osofsky, 373 F.2d 269, 273 (2d Cir.1967).

28

332 F.3d at 872;accord DeMaria v. Andersen, 318 F.3d 170, 175-78 (2d
Cir.2003); Lee v. Ernst & Young, LLP, 294 F.3d 969, 974-78 (8th Cir.2002);
Joseph v. Wiles, 223 F.3d 1155, 1158-61 (10th Cir.2000); Hertzberg v. Dignity
Partners, Inc., 191 F.3d 1076, 1079-82 (9th Cir.1999).

29

Krim, 210 F.R.D. at 585.

30

15 U.S.C. 77k(a)

31

DeMaria, 318 F.3d at 176 (quoting Lee, 294 F.3d at 976-77).

32

Rosenzweig, 332 F.3d at 873.

33

Harden v. Raffensperger, Hughes & Co., 933 F.Supp. 763, 766 (S.D.Ind.1996)
(citing Kirkwood, 590 F.Supp. at 1378).

34

Rosenzweig, 332 F.3d at 873 ("[B]ecause there was only one offering of Azurix
stock, all the plaintiffs' stock is traceable to the challenged registration

statement."); accord Hertzberg, 191 F.3d at 1080 (finding standing for

aftermarket purchaser because "the only Dignity stock ever sold to the public
was pursuant to the allegedly misleading registration statement at issue in this
case"); Joseph, 223 F.3d at 1160 ("[B]ecause [the defendant] made only one
debenture offering, the debentures [the plaintiff] purchased are directly
traceable to the May offering and registration statement.").
In Hertzberg v. Dignity Partners, Inc., the Ninth Circuit noted that "[i]f there is
a mixture of pre-registration stock and stock sold under the misleading
registration statement, a plaintiff must either show that he purchased his stock
in the initial offering or trace his later-purchased stock back to the initial
offering" but that "it might present a problem of proof in a case in which stock
was issued under more than one registration statement." 191 F.3d at 1080 & n.
4.
35

332 F.3d at 873 (citingGustafson v. Alloyd Co., 513 U.S. 561, 115 S.Ct. 1061,
131 L.Ed.2d 1 (1995)).

36

Indeed, under Appellants' view, in any case where more than 50% of the
available shares are issued pursuant to an allegedly false registration statement,
all shareholders would have standing. Furthermore, even when the PO% is less
than that, applying the "coin flip" methodology,see supra note 6, it would take
relatively few shares to confer standing. For example, even if only 30% of the
available shares are PO, or "tainted," shares, two shares will suffice to confer
standing because there would be a 51% chance that at least one of the two
shares is a PO share, i.e. 1-(1-0.30) 2 = 51%. (Put another way, the chance that
both shares will be "clean" is (0.70) 2, or 49%. Therefore, the likelihood of this
not being the case i.e. that at least one share is tainted is 51%.) When PO
shares are 10% of the market, still only 7 shares are needed: 1-(1-0.10) 7 =
52%. Even when PO shares are only 2% of the pool, 35 shares would confer
standing: 1-(1-0.02) 35 = 51%.

37

15 U.S.C. 77k(a) (emphasis added)

38

Krim v. PcOrder.com Inc., 212 F.R.D. 329, 332 n. 2 (W.D.Tex.2002) (order

denying motion for reconsideration of refusal to certify class).

39

U.S. CENSUS BUREAU, U.S. DEP'T OF COMMERCE, STATISTICAL

ABSTRACT OF THE UNITED STATES: 2004-2005, at 23 tbl.20 (124th
ed.2004),available at http://www.census.gov/prod/www/statistical-abstract04.html (last visited Mar. 1, 2005).

40

This is not unlike the well-known blue bus hypothetical to which Appellants

refer in their Reply Brief. One commentator offers the following account of this
hypothetical:
While driving late at night on a dark, two-lane road, a person confronts an
oncoming bus speeding down the center line of the road in the opposite
direction. In the glare of the headlights, the person sees that the vehicle is a
bus, but he cannot otherwise identify it. He swerves to avoid a collision, and his
car hits a tree. The bus speeds past without stopping. The injured person later
sues the Blue Bus Company. He proves, in addition to the facts stated above,
that the Blue Bus Company owns and operates 80% of the buses that run on the
road where the accident occurred. Can he win?
In this case and others like it, the plaintiff will lose; in fact, the case is unlikely
even to reach the jury. Although the defendant probably caused the plaintiff's
injury ... [t]he factfinder can only conclude from the plaintiff's evidence that
there was an 80% chance that he was injured by the Blue Bus Company and a
20% chance that he was not.... [T]he factfinder cannot, and the public knows it
cannot, make anything other than a bet on the evidence. Because the judicial
system strives to project an acceptable account about what happened, then, the
plaintiff's evidence is insufficient, notwithstanding the high probability of its
accuracy.
Charles Nesson, The Evidence or the Event? On Judicial Proof and the
Acceptability of Verdicts, 98 HARV. L.REV. 1357, 1378-79 (1985) (footnotes
omitted); see also Laurence H. Tribe, Trial by Mathematics: Precision and
Ritual in the Legal Process, 84 HARV. L.REV. 1329, 1349 (1971) ("[E]ven
assuming a [preponderance of the evidence] standard of proof ..., the plaintiff
does not discharge that burden by showing simply that four-fifths, or indeed
ninety-nine percent, of all blue buses belong to the defendant.").
This hypothetical is based on Smith v. Rapid Transit, Inc., 317 Mass. 469, 58
N.E.2d 754 (1945) (affirming directed verdict for defendant bus company). In
Smith, the court further noted that "`the fact that colored automobiles made in
the current year outnumber black ones would not warrant a finding that an
undescribed automobile of the current year is colored and not black, nor would
the fact that only a minority of men die of cancer warrant a finding that a
particular man did not die of cancer.'" Id. at 755 (quoting Sargent v. Mass.
Accident Co., 307 Mass. 246, 29 N.E.2d 825, 827 (1940)); cf. Howard v. WalMart Stores, Inc., 160 F.3d 358, 359-60 (7th Cir.1998) (Posner, C.J.).
41

There might well be other acceptable methods of aftermarket tracing even

where non-PO stock has entered the market. For example, if a putative plaintiff

possesses more shares than the number of non-PO shares on the market, our
reasoning inRosenzweig suggests that she must have standing for at least some
of the shares. If, for example, there are 100 non-PO shares and 900 PO shares, a
plaintiff with 101 shares would seem to have at least 1 PO share. In any case,
because Appellants have not suggested that these conditions apply here, we
need not resolve this issue. Nor need we consider at this time what effect, if
any, the practice of "short selling" would have in such a situation.
42

See J. Robert Brown, The Shareholder Communication Rules and the Securities
and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J.
CORP. L. 683, 693 (1988) (noting relatively infrequent use of street name and
nominee accounts in 1930s) (citing LOUIS LOSS, SECURITIES
REGULATION 42 n. 226 (1951)); see also Silber v. Mabon, 957 F.2d 697, 700
(9th Cir.1992) ("The widespread practice of holding securities in street names
grew out of a perceived `paperwork crisis' in the securities industry in the
1960s. Using street names facilitated the prompt handling of a huge volume of
transactions on the various exchanges in the buying and selling of securities by
investors and speculators." (internal quotation marks and citation omitted)).

43

Colonial Realty Corp. v. Brunswick Corp., 257 F.Supp. 875, 881

(S.D.N.Y.1966), cited approvingly, Barnes, 373 F.2d at 273.

44

See, e.g., In re Elscint, Ltd. Sec. Litig., 674 F.Supp. 374 (D.Mass.1987); Abbey
v. Computer Memories, Inc., 634 F.Supp. 870 (N.D.Cal.1986); Kirkwood, 590
F.Supp. at 1378-83 (discussing various tracing techniques and rejecting all but
the "direct trace" method); see also In re Quarterdeck Office Sys., Inc. Sec.
Litig., No. CV 92-3970, 1993 WL 623310 (C.D.Cal. Sept.30, 1993).

45

590 F.Supp. 1375, 1381 (D.Minn.1984),aff'd 760 F.2d 272 (8th Cir.1985)
(table).

46

Id. at 1380-81.

47

373 F.2d 269 (2d Cir.1967) (Friendly, J.)

48

Id. at 271.

49

Id.

50

Id. at 271-72 (emphasis added) (footnote omitted).

51

Id. at 272. Judge Friendly went on to note:

Without depreciating the force of appellants' criticisms that this construction

gives 11 a rather accidental impact as between one open-market purchaser of

a stock already being traded and another, we are unpersuaded that, by departing
from the more natural meaning of the words, a court could come up with
anything better. What appellants' arguments does suggest is that the time may
have come for Congress to reexamine these two remarkable pioneering statutes
in the light of thirty years' experience....
Id. at 273.
52

204 F.3d 149 (4th Cir.2000) (en banc)

53

33 U.S.C. 1251et seq.

54

33 U.S.C. 1365(g) (emphasis added)

55

Gaston, 204 F.3d at 155 (quoting Middlesex County Sewerage Auth. v. Nat'l
Sea Clammers Ass'n, 453 U.S. 1, 16-17, 101 S.Ct. 2615, 69 L.Ed.2d 435
(1981)). In another CWA case, we held that "the Constitution does not require
Sierra Club to produce an affiant who claims that Cedar Point's discharge in
particular injured him in some way." Sierra Club, Lone Star Chapter v. Cedar
Point Oil Co., 73 F.3d 546, 558 (5th Cir.1996) (emphases added). Indeed, "
[t]he Supreme Court has expressly held that a `threatened injury' will satisfy the
`injury in fact' requirement for [constitutional] standing." Id. at 556 (quoting
Valley Forge Christian Coll. v. Ams. United for Separation of Church & State,
Inc., 454 U.S. 464, 472, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982)).

56

Gaston, 204 F.3d at 152.

57

Id. at 162 (quoting 33 U.S.C. 1365(g)).

58

Cf. In re Ames Dep't Stores Inc. Stock Litig., 991 F.2d 953, 964 (2d Cir.1993) ("
[I]t is not a bar to a 10b-5 action that the false and misleading statements in a
Registration Statement are pertaining to an issue of a security ... which is not
the security purchased.").

59

See, e.g., Victor v. Nebraska, 511 U.S. 1, 14, 114 S.Ct. 1239, 127 L.Ed.2d 583
(1994) ("The beyond a reasonable doubt standard is itself probabilistic.");
Riordan v. Kempiners, 831 F.2d 690, 698 (7th Cir.1987) (Posner, J.) ("All
evidence is probabilistic statistical evidence merely explicitly so."); see also
Richard A. Posner, An Economic Approach to the Law of Evidence, 51 STAN.
L. REV. 1477, 1508 (1999) ("It is now generally recognized, even by the
judiciary, that since all evidence is probabilistic there are no metaphysical
certainties evidence should not be excluded merely because its accuracy can
be expressed in explicitly probabilistic terms....").

60

61

See, e.g., Prible v. State, ___ S.W.3d ___, No. AP-74487, 2005 WL 156555
(Tex.Crim.App. Jan.26, 2005) (affirming conviction in capital murder case,
rejecting argument that evidence was insufficient, where evidence included
DNA and several other factors).
See, e.g., People v. Soto, 21 Cal.4th 512, 88 Cal.Rptr.2d 34, 981 P.2d 958, 965
(1999) ("[The] probability that the suspect was indeed the source of the sample
... will usually depend, not on the DNA findings alone, but on a combination of
those findings together with other, non-DNA incriminating evidence.").

62

See 3 DAVID L. FAIGMAN ET AL., MODERN SCIENTIFIC EVIDENCE:

THE LAW AND SCIENCE OF EXPERT TESTIMONY 24-9.2 (2d ed. 2002)
("DNA typing is capable of exceedingly high discrimination, and in favorable
circumstances it can be shown that only one person in several billion could
have been the source of the evidence bloodstain."); see also Commonwealth v.
Gaynor, 443 Mass. 245, 820 N.E.2d 233, 240 (2005) (noting that "one in 64
quadrillion (64 x 10 15) African-Americans would be expected to have the
same DNA profile as the sperm fraction"); Rayford v. State, 125 S.W.3d 521,
526 (Tex.Crim.App.2003) ("The DNA expert testified that the probability of
the DNA belonging to someone other than Hall was one in 116 billion."); cf.
Miller v. Albright, 523 U.S. 420, 484-85, 118 S.Ct. 1428, 140 L.Ed.2d 575
(1998) (Breyer, J., dissenting) (citing E. Donald Shapiro et al., The DNA
Paternity Test: Legislating the Future Paternity Action, 7 J.L. & HEALTH 1,
29 (1992-1993), for the proposition that "current testing methods can determine
probability of paternity to 99.999999% accuracy").

63

Soto, 88 Cal.Rptr.2d 34, 981 P.2d at 965.

64

Cf. Deposit Guar. Nat'l Bank v. Roper, 445 U.S. 326, 332 n. 5, 100 S.Ct. 1166,
63 L.Ed.2d 427 (1980) (noting that the district court may have "a
responsibility, prior to approval of a settlement and ... dismissal of the class
action, to provide an opportunity for intervention by a member of the putative
class for the purpose of appealing the denial of class certification" (emphasis
added)); Nichols v. Mobile Bd. of Realtors, Inc., 675 F.2d 671, 675 (5th
Cir.1982) (permitting putative class members to intervene "solely for the
purpose of appealing the district court's decertification of the class action" even
after settlement of named plaintiffs' claims); see also United Airlines, Inc. v.
McDonald, 432 U.S. 385, 392, 97 S.Ct. 2464, 53 L.Ed.2d 423 (1977).

65

Cf. Roper, 445 U.S. at 331-40, 100 S.Ct. 1166, 63 L.Ed.2d 427 (1980) (holding
that plaintiffs can appeal denial of class certification despite a tender to named
plaintiffs in a class action of the amounts claimed in their individual capacities,
followed by the entry of judgment in their favor on the basis of that tender, over

their objection); United States Parole Comm'n v. Geraghty, 445 U.S. 388, 404,
100 S.Ct. 1202, 63 L.Ed.2d 479 (1980) (where denial of class certification is
challenged on appeal, "an action brought on behalf of a class does not become
moot upon expiration of the named plaintiff's substantive claim, even though
class certification has been denied").
66

Non Commissioned Officers Ass'n of the United States v. Army Times Publ'g
Co., 637 F.2d 372, 373 (5th Cir.1981).

67

See Krim, 2003 WL 21076787, at *3 (citing 15 U.S.C. 77k(e)).

68

See Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1045 (5th Cir.1981)
("[A] suit brought as a class action must as a general rule be dismissed for
mootness when the personal claims of the named plaintiffs are satisfied and no
class has properly been certified."). This, as the district court acknowledged,
does not foreclose the right to appeal the denial of class certification. See Krim,
2003 WL 21076787, at *4 (citing Roper, 445 U.S. at 332-36, 100 S.Ct. 1166).

69

See Whitfield v. Lindemann, 853 F.2d 1298, 1306 (5th Cir.1988) ("Absent
statutory mandate, the award of prejudgment interest generally is discretionary
with the trial court.").

70

Krim, 2003 WL 21076787, at *3.

71

Appellants' argument that the defendants'"maneuver" (i.e. defeating class

certification and then "picking off" the only remaining plaintiff with standing)
deprived absent class members their day in court is without merit. It was the
Appellants who chose not to pursue an appeal of the denial of class
certification. In any case, the district court afforded the plaintiffs the
opportunity to return in the event that they can establish standing and suggested
that Intervenors are free to initiate a suit of their own.